- Sime Darby yesterday announced that its sub-subsidiary Sime Darby Engineering (SDE) had on 26 March received a notice of arbitration from Swiber Offshore Construction Pte Lte. This relates to “disputes and differences” involving Swiber’s claims against SDE, pursuant to provisions of a consortium agreement signed between them on 23 February 2010. The dispute sum, if any, was not revealed.

- They had entered into the agreement to govern their relationship in the consortium which had a month earlier been awarded a US$188.9mil wellhead platform contract, for stateowned Oil and Natural Gas Corporation Ltd’s (ONGC) B-193 marginal field development in western India.

- The contract for the wellhead platform project was executed by ONGC and the consortium on 26 February 2010. We believe Sime had then completed the fabrication of five wellhead platforms for the project at its yards in Johor some 12-13 months later.

- In yesterday’s announcement, Sime said “disputes and differences” had since arisen between the Singapore-based Swiber and SDE. Their agreement expressly stipulates that any dispute between them shall be referred to arbitration at the Singapore International Arbitration Centre.

- In the absence of details, we find it unusual for the “disputes and differences” to have come out in the open only now, two years after Sime had fulfilled its main obligations under the wellhead platform project. Sime said the proceedings are not expected to have a material impact on the group for the financial year ending 30 June 2013.

- Soon after completing the fabrication of the wellhead platforms, Sime had officially announced its exit from the oil and gas sector, and the proposed sale of its fabrication yards in Pasir Gudang and Teluk Ramunia to MMHE and Petronas, respectively. The transactions were completed one year ago for a total final consideration of RM689.4mil. Sime had continued to undertake its then existing fabrication obligations right up to last year.

- The implications of the arbitration are not known as this juncture, but we do not expect them to affect the group’s prospects as it has already exited the oil and gas sector. We maintain a BUY on Sime Darby, with a target price of RM11.20/share, based on a sum-of parts valuation and an implied PE of 16x for FY13F.

Source: AmeSecurities